The 5 Most Overrated IPOs of 2011

It's the next big thing! It'll make you a millionaire! Talk about your high expectations. This year has certainly seen its fair share of hyped companies, both new and old. Some hype may be warranted, but it seems like quite a few companies have launched helium IPOs this year; they floated to the stratosphere before finally deflating.

While compiling a series on the year's best- and worst-performing IPOs, I saw a number of compelling stories that deserved to be told. Here are a few of them, representing my personal selection of 2011's most overrated newly public companies.

Proprietary methodology revealedI looked for companies that seemed to have a major disconnect between their potential and their valuation, the latter being at least $500 million. Most of the more than 100 IPOs so far this year have slipped rather quietly under the radar. But the companies below, by and large, were anything but quiet, and most pumped in more helium by restricting the size of their initial offers.

Bubble 2.0LinkedIn's IPO benefited tremendously from pent-up demand for social media shares, which it fed by only offering an 8% stake to the public on its first day of trading. Even LinkedIn's employees agreed that it was too much when the $45 IPO price became $94.25. A secondary offering, combined with the end of LinkedIn's lockup period, has kept the company from climbing back toward triple digits -- not that it ever should, as I see it. The company's absurdly high 864 P/E also has a long way to fall before most investors would consider it fairly valued.

Lend me your ears and I'll sing you a songPandora's most obvious counterpart in the radio sphere is Sirius XM (Nasdaq: SIRI) , so it's only fair to compare the two, to see just how absurdly overhyped Pandora is.

Pandora

Sirius XM

Market Cap

$1.74 billion

$6.56 billion

P/E / Forward P/E

NM / NM

43.8 / 21.9

Projected 1-Year / 5-Year Growth

50% / 40%

14.3% / 30%

Active Subscribers

36 million*

21.3 million

TTM Revenue

$241 million

$2,967 million

TTM Free Cash Flow

($9 million)

$381 million

Sources: Yahoo! Finance, Morningstar, and news reports. The figures are as of Nov. 25. NM = not meaningful due to negative earnings. TTM = trailing 12 months. *Based on number of registered users who accessed the service on a monthly basis as of July 2011. Not all of Pandora's subscribers pay for access.

A subscriber means a lot less, value-wise, to Pandora than it does to Sirius XM. If these figures hold up, Pandora would need more than 500 million registered users accessing the site monthly to equal Sirius' revenue, to say nothing of its potential profits over the long run. With less than 10% of Pandora shares publicly traded, it's safe to say the company's early investors will be waiting a while before their investment gets back in the black -- if that ever happens.

Don't run on Dunkin'One of these things is not like the others -- Dunkin' Brands is the lone company on this list without a tech connection. It's tough to even call it "overrated," as Dunkin's been around for decades, but its recent private-equity-driven IPO was popular enough to earn the company a 41 P/E, well greater than that of coffee competitor Starbucks' (Nasdaq: SBUX) P/E of 25.

The difference might lie in its perceived expansion potential. Dunkin' dominates the Northeast but hasn't achieved ubiquity elsewhere. However, the company's had longer than Starbucks to stake its claim to the West Coast, and its IPO proceeds are mostly earmarked to pay down debt -- essentially giving its private-equity owners a big payday. Shareholders expecting a Dunkin'-fueled portfolio jolt might find the reality a bit bitter.

Don't just be active, be proactiveLongtime Fool contributor Rick Munarriz told us to toss Active Network out soon after its public debut, citing competitive headwinds, poor financial performance, and slowing growth as good reasons to avoid the online event organization and promotion hub. The market's taken his advice, and there are reasons to worry about this company's long-term potential. There are several excellent online alternatives for event management, including Meetup.com, Evite.com, and Facebook, which could become one of 2012's most overrated IPOs. They may not currently have the same functionality as Active Networks, but creating that functionality is only a few great programmers away.

It's still overrated, even at half-priceAh, Groupon. Where do I even start? Some have called it the fastest-growing company in history, with only moderate hyperbole. Google offered to buy it out for $6 billion, but Groupon's leaders had bigger plans. They wanted to go public at a $30 billion valuation, valuing them more dearly than most major retailers. Thanks to some clever accounting tricks and tremendous hype, Groupon was the talk of the financial press for months… until the bad news started leaking out.

Somehow, the daily deals company's still worth $10 billion. But competition from LivingSocial -- which may be headed toward its own IPO -- and other players is a constant threat. Keep in mind that Amazon.com, when it went public, had a market cap of $438 million. By my calculations, if Groupon's first shareholders are hoping for the next Amazon, they'll need its market cap to reach $1.89 trillion. I don't see that happening.

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That could have been clarified better to read "early post-IPO investors", or a similar phrasing. My apologies. None of these were meant to reference pre-IPO venture capital or other pre-IPO investments.

Also, DMD, QIHU, and RENN are all in the "Worst IPOs of 2011", since they had the worst performance to date.

I'm not sure Starbucks is the best company to which to compare Dunkin' Brands. Starbucks restaurants are mostly company owned (except for those licensed to operators in airports etc., and overseas operations) and both Dunkin' Donuts and Baskin Robbins are franchised. It's a different business model. Subway actually might be a closer comparison.

I chose Starbucks as a reference because Dunkin' stores are reported to make a large amount of their revenue from coffee sales rather than donuts and sandwiches. This is a point brought up by several financial sites, and seemed more apt than a straight franchised-model vs. franchised-model comparison, since neither Starbucks nor Caribou Coffee are franchise operations.

From what I can tell, Subway is privately-held, making any comparison much more difficult.